Brookdale Senior Living Inc.

operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Q3 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star and one. I would now like to turn the call over to Jessica Hagel, Vice President of Investor Relations. You may begin.

Thank you and good morning. I'd like to welcome you to the third quarter 2024 earnings call for Brookdale Senior Living. Joining us today are Cindy Byer, our President and Chief Executive Officer, and Don Cusso, our Executive Vice President and Chief Financial Officer. All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date, and we expressly disclaim any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of the factors that could cause actual results to differ are detailed in the earnings release we issued yesterday, as well as in the reports we file with the SEC from time to time, including the risk factors contained in our annual report on Form 10-K and quarterly reports on Form 10-Q. I direct you to the release for the full Safe Harbor Statement. Also, please note that during this call, we will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information, which may be found at BrookdaleInvestors.com and was furnished on an 8K yesterday. Now, I'll turn the call over to Cindy.

Thank you, Jessica. Good morning to all of our shareholders, analysts, and other call participants. Welcome to our third quarter 2024 earnings call. At Brookdale, we are deeply committed to creating value for our shareholders by providing high-quality care and services to our residents, ensuring that we are in an attractive place for employees to work, and improving both our capital structure and our capital allocation. Before getting into quarter, I would like to briefly highlight a number of recent accomplishments that reflect this commitment. We delivered 80 basis points of sequential quarterly occupancy growth, which was better than the broader industry average and reflected continued weakness in paid third-party referral sources. We generated $14 million of adjusted free cash flow in the third quarter, improving our cash flow significantly over the prior year. We more than doubled the number of communities operating with our industry-leading Brookdale Health Plus program, and we received a third-party validation that our clinical outcomes are even stronger than last year. We worked to ensure the health and well-being of our residents throughout multiple hurricanes, including successfully evacuating 13 communities during Hurricane Milton. We were pleased with our team's emergency response and are pleased that our residents are back home. We were named by Newsweek to the top 200 most loved workplaces list. We executed purchase agreements for a creative acquisition of 41 currently leased communities that will provide meaningful benefits to Brookdale, both in the immediate term and over the longer term. We issued new convertible debt while extending a majority of an existing convertible to 2029, which, in combination with expected mortgage financing and cash on hand, enables us to fund these acquisitions. We successfully refinanced the vast majority of our debt maturities without extension options through 2026,

and

at every level of our organization, we remain steadfast in our commitment to enriching the lives of those we serve with compassion, respect, excellence, and integrity. In the third quarter, RevPAR grew .9% over the prior year. At the same time, adjusted EBITDA grew 15% year over year to $92.2 million, roughly the midpoint of our previously provided guidance range. Third quarter occupancy growth, while significantly better than historical seasonal trends, was not as robust as we had wanted. Move-ins improved from the second quarter but remained below prior year, primarily driven by continued softness from two large paid third-party referral sources. As I shared last quarter, we are redeploying marketing spend from these sources to internal marketing and advertising channels, and while we have seen success at generating third-quarter leads and move-ins at a more attractive cost, internal move-ins were not able to fully offset the continued decline from paid third-party partners. We continue to work closely with these critical partners to improve performance, and considering the pressures they are facing, we are pleased that in the third quarter, Brookdale grew share amongst the larger operators within one of the paid third-party referral sources. Our sales and marketing teams are leaning in to new and unique sales campaigns at the local, market, and national level to drive qualified leads and attract new residents. For example, in the fourth quarter, we are expanding our professional referral targeting around our person-centered and clinical programs like Brookdale Health Plus and ClearBridge. ClearBridge, which is Brookdale's evidence-based approach to memory care, has been recognized by the Alzheimer's Association for Alzheimer's and Dementia, Activities of Daily Living, and other person-centered care and assessments. We have also increased the number of communities that are hosting themed local events to introduce prospective residents to our high-quality care, personalized services, culinary experience, and Brookdale's strong value proposition. I am confident that all of our sales and marketing initiatives, including those I just mentioned, will support sustainable occupancy growth. In our efforts to grow the top line, we remain intensely focused on our priority of returning to pre-pandemic occupancy levels while maintaining our steadfast commitment to profitable occupancy growth and to getting every available unit in service at the best profitable rate. Compared to the prior year, third quarter same-community growth grew 4.2%, which was an acceleration from the second quarter -over-year growth rate. We were pleased that our RevPoR growth accelerated sequentially, whereas Nick reported that the industry experienced a sequential deceleration in average acting rent growth. This, coupled with our diligent focus on appropriate expense management, supported third quarter same-community adjusted operating income margin expansion of 100 basis points over the prior year while continuing to meet our resident needs, provide high-quality care and personalized service, and remain in compliance with applicable regulations. Dawn will speak in detail to our fourth quarter guidance, but I would like to provide a couple of high-level perspectives. Our near-term expectations reflect careful consideration of everything I've spoken to. I am optimistic about our future and our continued -over-year occupancy and adjusted EBITDA growth in both the next quarter and over the long term. I also understand that third quarter move-in volume has an impact on future months, and we are appropriately considering this in our fourth quarter guidance ranges. Our guidance also includes approximately $3 million the fourth quarter hurricane expense, as approximately 70 of our communities were impacted. This level of expense has a meaningful impact on our results, but supporting the safety and well-being of our residents and associates is worth every penny. This is our overarching priority and is at the core of everything we do. I'm excited to share some updates about our Brookdale HealthPlus program, which also directly supports our overarching goal of the health and well-being of our residents and associates. As I've mentioned before, HealthPlus is an innovative care delivery model designed to support an enhanced quality of life for our residents through technology-enabled, evidence-based preventive care coordination. It focuses on addressing the unique needs of seniors with chronic conditions by coordinating care and minimizing gaps, which are unfortunately common in the aging population. Recently, we received results from an expanded third-party analysis focusing on communities that have been the health plus platform for at least 12 months. The findings were incredible, showing that we have built on the success of HealthPlus, including 80% fewer emergency room and urgent care visits and 66% fewer hospitalizations compared to seniors living at home. In fact, our resident outcomes in HealthPlus communities were even stronger when compared to the outcomes for residents in other senior living communities within the industry, according to an independent analysis. These results reaffirm our belief that HealthPlus provides a key competitive advantage for Brookdale, and its positive impact will grow even further. This month, we are completing our final HealthPlus rollouts for 2024, bringing the total to 130 communities, and we look forward to sharing future updates as we prepare for further expansion in 2025. As you can see, we continue to make progress on enhancing operations, but our focus on value creation for our shareholders doesn't stop there. At the close of the third quarter, we were very pleased to announce a series of accretive transactions. These included agreements to acquire 41 communities from three existing triple net lease portfolios, a private convertible senior notes transaction through exchange and new issuance, and a favorable rate agency financing transaction with simultaneous repayment of a 2025 debt maturity. Specific to the planned community acquisitions, by replacing future lease obligations with more favorable ownership structures, we are increasing our cash flow, reducing exposure to escalating lease costs, benefiting from long-term value creation opportunities, and gaining greater strategic flexibility to manage our portfolio. Overall, the communities we are acquiring are high quality assets with above average performance in good markets, many of which are high growth affluent markets. We have confidence in these communities and have proven that we can successfully generate and sustain value from them. As a result, ownership of these communities allows us to take full advantage of the senior living industry's positive growth outlook, enhancing our expected financial results with predictable high yield returns. Specific to the convertible financing, by extending the vast majority of our 2026 senior notes to 2029 at a higher conversion price, and by securing additional funding through newly issued 2029 notes with two of our key shareholders, we are able to support these unique acquisition opportunities with favorable capital market terms. These immediately accreted transactions are expected to increase adjusted EBITDA by approximately $33 million annually and improve adjusted free cash flow by an estimated $15 million annually following closing. Lastly, on our February earnings call, we will be providing 2025 annual guidance, but I wanted to take a moment to introduce some early perspectives for next year. We are unwavering in our commitment to profitable growth and to achieving consistent, positive adjusted free cash flow. Our strategy has consistently prioritized long-term objectives and progressing towards the meaningful organic growth opportunity that lies ahead. We can achieve this opportunity by remaining intensely focused on our key strategic priorities, which allow us to navigate short-term fluctuations with a clear and consistent framework for long-term success. For 2025, our strategic priorities will remain. First, get every available room in service at the best profitable rate. Second, attract, engage, develop, and retain the best associates. And third, earn resident and family trust and satisfaction by providing valued, high-quality care and personalized service. In 2025, we expect to deliver another year of steady and sustainable occupancy growth. Similar to pre-pandemic, our resident rate increases will be reflective of the increases in cost of living and the cost of operations, which are moderated but remain above pre-pandemic levels. In 2025, we will maintain our ongoing commitment to appropriate expense management at both the community level and at our community support centers while ensuring we continue to meet our residents' needs, provide high-quality care and services, and remain in compliance with applicable regulations. As an example, upon the expiration of their lease terms this year, we reduced our physical office space in both Milwaukee and Nashville by approximately 75% in total, which provides several million dollars of annualized lease expense reduction. These are just a few of the high-level considerations that support our expectation that like 2024, 2025 will be a year of adjusted EBITDA growth and meaningful, adjusted free cash flow improvement. I am confident in Brookdale's strong positioning for meaningful long-term growth, particularly as we make further progress toward restoring pre-pandemic occupancy levels. This confidence is driven by favorable supply demand dynamics, our continuous improvements in operational performance, and our resilient business model. Additionally, Brookdale's competitive advantages uniquely position us to capitalize on the unprecedented target demographic growth ahead. As demand for our communities and services grow, we expect this to fuel significant growth in operating income and create long-term value for all stakeholders.

I'll now turn the call over to Dawn. Thank you, Cindy. Good morning, and thank you for being here today. I'm proud of our many accomplishments that Cindy spoke to and would like to provide additional color on several items, including our third quarter results and fourth quarter expectations. Beginning with third quarter revenue, residency revenue grew .7% over the prior year quarter. This revenue increase was despite a .3% or approximately 1200-unit reduction in capacity since the beginning of the prior year quarter as a result of community dispositions, primarily through lease terminations. Consolidated RevPAR grew 5.9%, including a 130 basis point increase in weighted average occupancy and .3% Rev4 growth over the prior year. This marked our 11th consecutive quarter of triple-digit -over-year occupancy increases, and compared to the second quarter, occupancy grew 80 basis points sequentially. As Cindy shared, our move-ins remain pressured in the third quarter, but we were very pleased that our third quarter move-out volume was better than both prior year and the second quarter, driven by continued favorable controllable move-outs. On a dollar basis, our sequential RevPAR declined moderately as we continue to see the normal RevPAR impact of newer residents generally moving in with lower acuity and therefore having a lower care rate than existing residents. Specific to our same community portfolio, third quarter RevPAR increased .6% over the prior year, driven by 100 basis points of occupancy growth and .2% increase in RevPAR. We were pleased that our -over-year same community RevPAR growth accelerated 10 basis points from the second quarter growth, while the industry asking rent growth over the prior year period decelerated between the second and third quarters. Moving to expenses, same community labor expense as a percent of revenue improved 140 basis points compared to prior year third quarter. This positive performance versus the prior year was a result of lower premium labor expense, the favorable flow through of top line growth given the fixed cost nature of our business, and the continued benefit of improved turnover, which results in longer tenured associates who become naturally more proficient in their roles. Third quarter same community other facility operating expense as a percent of revenue was 40 basis points higher than the prior year, largely driven by elevated estimated insurance expense and the outsource of our data centers, both of which have impacted each quarter of this year as well as normal inflation. As a reminder, the data center's outsourcing is neutral from a cash flow perspective. With our continued commitment to appropriate management of our expenses, we once again delivered double-digit adjusted operating income growth and triple-digit adjusted operating income margin expansion within our same community portfolio while continuing to meet our residents' needs, provide high quality care, and maintain regulatory compliance. In fact, we have now delivered three years of consecutive quarters of -over-year adjusted operating income growth. Moving beyond community level expenses, third quarter general and administrative expense excluding non-cash stock-based compensation expense was flat as a percent of revenue to the prior year third quarter and reflected a modest step down from the second quarter on a dollar basis. Lastly, cash operating lease payments were $64 million, generally flat to the second quarter and to prior year. These financial results culminated in third quarter adjusted EBITDA of just over $92 million. Compared to the prior year third quarter, adjusted EBITDA increased $12 million or 15%. I'd like to take a moment and note four important considerations when comparing our third quarter adjusted EBITDA sequentially to the second quarter. First, the third quarter includes an incremental day and an incremental holiday which results in higher expense, most of which is labor with only a minor favorable impact to revenue. Second, the third quarter has higher seasonal utility expenses given the hotter summer months compared to the milder spring months, particularly this year with extreme heat in the quarter. Third, our marketing shift from paid third-party referral sources to internal channels while having no cash impact to this year did result in higher third quarter marketing expense. And fourth, our third quarter included approximately $1 million of expenses related to Hurricane's barrel and Debbie. In aggregate, we estimate the impact of these factors has been roughly $11 million when comparing the third quarter adjusted EBITDA to second quarter adjusted EBITDA. In the third quarter, we generated a positive $14 million of adjusted free cash flow, which was $11 million higher than prior year. This year over year increase was driven primarily by our adjusted EBITDA growth, partially offset by continued higher interest expense. As of September 30th, total liquidity was $324 million, which reflects a $16 million cash outflow related to the 2025 debt refinancing that closed prior to the end of the quarter. This liquidity level does not reflect the closing of our convertible senior notes due 2029 offering, which was announced on September 30th and closed subsequent to the quarter end. On September 30th, we announced five separate transactions, which I'll summarize into three groupings and then provide individual details of each. First, a private convertible senior notes transaction, including an exchange and new issuance of notes. Second, the planned immediately accretive acquisition of three separate currently leased triple net portfolios, which in aggregate include 41 communities or 2789 units and supports our ownership strategy. And third, the completion of a new agency financing and concurrent repayment of a 2025 debt maturity. Regarding the first, through private transactions, we exchanged $207 million of our convertible senior notes due 2026 for convertible senior notes due 2029. This exchange had many benefits, including largely extending our debt maturity runway until 2027 and increasing the conversion price on the exchange notes from $8.10 to $9. The remaining $23 million of existing notes maturing in October 2026 remains unchanged. As part of these private transactions, we issued an additional $150 million of new convertible senior notes due 2029, which provide funding for our planned acquisitions at an attractive rate. The net cash proceeds of this transaction were approximately $135 million. We were very pleased to enter into these private transactions with multiple large shareholders and are appreciative of their strong partnership and support of Brookdale. Regarding our planned acquisitions, for a combined purchase price of $610 million, we plan to acquire communities from three separate currently leased portfolios. In addition to the proceeds from the issuance of our 2029 convertible senior notes, we plan to fund the acquisition through a combination of $195 million of assumed agency debt at a .92% fixed rate, additional non-recourse agency mortgage financing uncertain of the assets, and the use of cash on hand, which we estimate will be approximately $50 million. We expect the close of the transactions by year end. We expect annualized adjusted EBITDA to increase $33 million with the initial quarterly benefit of that occurring within the fourth quarter and reflected in our guidance, which I'll speak to shortly. And following the closing, these transactions are expected to be immediately accretive to adjusted free cash flow. On a cash basis, we expect to annually reduce cash lease payments by $47 million and improve annualized adjusted free cash flow by $15 million, each beginning in 2025. This is following considerations for financing and the resulting interest expenses. The positive impact to adjusted EBITDA begins earlier than the positive impact to adjusted free cash flow due to the change in lease classifications that occurred upon the finding of the purchase agreements. In addition to the immediate financial benefits, these acquisitions benefit Brookdale and our shareholders over the long term as we strategically position ourselves to capture upside from the powerful senior housing tailwinds, grow our portfolio ownership position while also improving our flexibility to recycle capital, and secure high yielding, predictable returns through replacement of more costly and increasing lease structures with lower cost fixed capital. Lastly, regarding our closing of new agency refinancing and repayment of existing debt, we obtained a $182.5 million agency loan through Fannie Mae, which returns in 2029. The loan is secured by non-recourse first mortgages on 16 communities, bears interest at a fixed rate of .67% and is interest only for the first two years. We use proceeds from the $182.5 million loan to repay a $197.1 million loan, which had a weighted average fixed and variable rate of .8% at the time of repayment and which was set to mature in September 2025. With this transaction, we successfully cleared all of our debt maturities without extension options through 2025 and when coupled with the convertible senior notes transaction, we cleared the runway of all non-extendable debts with the exception of $43 million through the end of 2026. We're very pleased with the outcome of each of these transactions and believe that they are examples of our continued proactive management of liquidity, capital structure and capital allocation for the benefit of our shareholders. Lastly, I'd like to speak to our fourth quarter guidance. In yesterday's press release, we guided to fourth quarter rev par growth of 5% to .5% over the prior year and adjusted EBITDA on the range of $93 to $98 million. We expect fourth quarter weighted average occupancy to be higher sequentially than the third quarter. We believe that the fourth quarter year over year rev par growth will be relatively in line with our -to-date growth trend. When comparing our fourth quarter adjusted EBITDA expectations of $93 to $98 million to the prior year fourth quarter, there are four key considerations. First, the meaningful year over year residency revenue and resulting adjusted EBITDA benefit associated with our fourth quarter rev par growth expectations. Second, year over year expense growth associated with broad inflationary pressure, higher estimated insurance expense, technology enhancements in our communities and the outsourcing of our data centers which shifted spend from capital to expense, all of which you've heard me previously speak to during 2024. Third, we expect approximately $3 million of hurricane expense related to the community level damages from hurricane Tilleen and Milton. And fourth, the immediately favorable adjusted EBITDA impact of our recently announced acquisition agreements which in the fourth quarter will reduce cash operating lease payments by approximately $8 million. All of these year over year considerations have been incorporated into our guidance range. As it's also useful to compare our fourth quarter expectation sequentially to our third quarter adjusted EBITDA results, I wanted to provide a similar bridge. The midpoint of our fourth quarter rev par guidance range results in a slight step down in rev par on a dollar basis from the quarter to the fourth quarter. This reflects the occupancy and rev par expectations that I provided a moment ago. Two other factors impacting our sequential performance expectations are the unfavorable hurricane expense and the favorable seasonal utilities expense. These two factors roughly offset one another but are important to note nonetheless. Third, as we approach our year end, we get better visibility into employee insurance and benefits. With those generally running higher this year, we've included that expectation in the fourth quarter. And lastly, similar to the year over year comparison, our fourth quarter adjusted EBITDA will benefit sequentially from the $8 million favorable impact as a result of our recently announced acquisition agreements. I'll now turn the call back over to Cindy. Let me close by expressing my

deep gratitude to our associates in our communities, our field leadership, and at our community support centers. I am so proud of the way that they unite to support our residents, one another, and our shareholders. I am especially grateful for their focus on ensuring that throughout the four major hurricanes we've faced over the past four months, the safety and well-being of our residents remained the top priority. With countless stories of devastation caused by these storms, including with our own Brookdale associates and the families of our residents, we successfully evacuated more than a thousand residents and their pets during Hurricane Milton, and we were pleased to be able to bring them home within days of the storm. The success of these efforts is a result of our industry-leading emergency response team and our community and field associates for the meticulous planning, exceptional crisis management, and commitment to our residents. Every day, I am proud to be one of Brookdale's 36,000 associates dedicated to serving our mission and working to ensure a long and purpose-driven future for our residents and teams of associates.

Great, thank you so much. At this time, we will open it up for questions. I would like to remind everyone in order to ask a question, press star and the number one on your telephone keypad. We will take the first question from Ben Hendricks with RBC Capital Markets. Your line is open.

Hi, this is Mike Morillon for Ben. A lot of moving pieces with these recent transactions. Just so we understand, could you walk us through the income statement? It sounds like the lease classifications, kind of a one-time benefit of $8 million in 4Q EBITDA with the corresponding increase in interest expense, and you don't expect that to impact 2025 numbers. And then separately, in 2025, you expect a $25 million increase in EBITDA and a $10 million increase in interest expense related to the acquisition of currently leased assets and then subsequent financing. Is this the right way to think about it?

Hi, Mike. This is Dawn. Thank you for the question. And as it relates to Q4, that's exactly right. The $8 million is kind of a timing difference of a benefit to adjusted EBITDA with a corresponding increase in our interest expense. Now, as we said in our prepared remarks, if you look at 2025, what we would expect is a $33 million increase in adjusted EBITDA as those rent payments go away. And then we would expect to see an adjusted free cash flow pick up of $15 million, kind of replacing those lease payments with the interest expense from the debt that we would use to that we would use to finance the acquisitions from.

And that's compared to the amounts pre-agreement.

Okay. All right. That's helpful. And just shifting gears, could you dive into the competitive dynamics for the third-party referral sources that were pressured? Was this primarily a cost thing? Are you bidding against other competitors for these referrals? Thanks.

Mike, this is Cindy. That's a good question. And no, it's not a cost thing. Just to give you perspective, we talked about in our second quarter call and again, in our third quarter call, the fact that our move-ins associated with our third-party paid referral sources, two of them in particular, were relatively soft relative to our historical trend. And once we identified this trend, we took action to launch incremental sales initiatives, increasing our internal planned marketing spend, and those actions have begun to yield results. While our move-ins during the third quarter were still down relative to last year, the performance did improve sequentially. And if you think about this on a -to-date basis, our move-ins are consistent with our pre-pandemic averages, despite the weakness in the two large third-party paid referral sources. Just to give you some context, we get a few hundred move-ins every month from two large paid referral sources. Through the third quarter, we had seen a -over-year decline of several hundred move-ins, which we've been working hard to offset. I'm really pleased that during the month of October, our move-ins from these two large third-party referral sources were roughly flat to last year. And just one other piece of context is one of the two third-party referral sources. Their volume is just down, and every person is impacted. And with the second, we did actually improve our position within the third quarter, and so we're pleased with that.

All right. That's helpful. Thank you.

Thanks, Mike. Thanks, Mike.

Your next question comes from the line of Brian Tankwillet with Jefferies. Your line is open.

Hey, good morning. Maybe, Cindy, just to follow up on that, so how should we be thinking about the strategy with these third-party referral sources? Clearly, you're spending more money on marketing here. So is that kind of a shift in strategy, or is this more temporary with a marketing spend? And then what sort of timeline are you thinking in terms of the ability to return back to more normalized referral patterns?

I was pleased that in the month of October, we actually were essentially flat year over year with our paid third-party referral sources in the aggregate. So I think that was a good thing. And I do want to be clear that we're not spending more cash because we pay for a move-in from a third-party paid referral source when the resident moves in. There's a difference in timing. When we do our own internal marketing, we have to spend the money and then work the lead and get the move-in, which lags. So it's the same cash. It's just accounting. The marketing spend on internal is expensed when you incur the marketing. And for an actual move-in from a paid third-party, it gets amortized over a year. Our strategy is to get every one of our rooms in service at the best profitable rate. So we want to get more referrals from paid third parties, and we want to have those residents move into our communities. So it's both and. Our strategy to try to recover is because we're seeing less volume than we had wanted or expected or historically seen, and so we're responding to a third-party environment.

Got it. Totally understand. And then maybe shifting gears, as I think about your REV PAR guidance, 5% for Q4, curious what you're seeing in terms of the competitive environment or the pricing environment, and then how are you thinking about rate increases, rate bumps for 2025?

Thank you, Brian. This is Dawn. When you think about our REV PAR guidance, it is, like I said in my prepared remarks, our expectation for occupancy is that we're going to increase that sequentially. And kind of in the normal course, our REV PAR is expected to decline sequentially. We typically will see that as you have a higher acuity resident move out, and then you have a lower acuity resident moving in. And then in addition, we've been looking at and kind of doing repricings in certain markets as we've been looking at remaining competitive throughout the year. So that is the expectation for our REV PAR guidance. Now, as far as 2025, we aren't giving guidance for 2025 yet. So I think we've, Cindy said in her prepared remarks, we'll come out next quarter with our guidance for 2025.

And just to be clear, when Dawn's talking about Q4, we're expecting to hold that .3% -over-year REV PAR growth. And I'm really proud of the fact that when the industry decelerated their REV PAR in Q3, we improved our REV PAR growth -over-year.

Got it. Perfect. Thank you.

Thank

you. The next question comes from the line of Joanna Gajic with Bank of America. Your line is open.

Hi. Good morning. Thanks so much for taking the question. Sorry, I joined late. So I wasn't sure whether this was discussed already when it comes to the Q4 guidance rate, and if you adjust out the 3 million hurricane cuts, but then there's also the 8 million change in lease expense. I don't know if you guys discussed, because if you adjust out the guidance implies EBITDA would actually decline sequential $2 million. So what's driving that, the question decline versus historically Q4 EBITDA would increase from Q3.

Yeah, thank you, Joanna. This is Dawn. I appreciate the question. And you're exactly right. What we are very proud of is if you take a step back is our 15% -over-year adjusted EBITDA growth and the fact that we're within 5% of pre-pandemic adjusted EBITDA, and we've delivered 31% adjusted free cash flow growth this year. As we think about the fourth quarter guidance, we just talked through kind of the REV PAR growth that we expect, and at the midpoint, our REV PAR would be flat sequentially. It's driving kind of the top line flat and pressured with the move in Cindy had talked about in her prepared remarks. Now, on the expense side, what I would say is there's always this level of variability and timing that we have on our expenses as it relates to things such as incentive and insurance and other estimates that are going to impact our expense run rate. But taking one step back, our total operating expense is $548 million for the quarter, and 1% of that is about $5 million. So that level of variability as you think about sequentially during the quarters is just not that material. What we're most proud of is if you look at our same store operating margin, we've delivered 140 basis points of operating margin growth year over year.

Okay, so I guess you're saying that there's just variability. So historically, EBITDA would increase fourth quarter from third quarter, but this year you're kind of giving yourself more or is there something else to call out that would explain that kind of lower seasonality versus history?

Yeah, I think one of the things that I would point to that we look at our expenses across and estimate with the variability, but we have higher insurance and some employee health costs that have been running higher this year over last year. And so just as for maybe a little bit of context around that variability.

Okay, and I don't know, maybe you mentioned this before, but what does the guidance assume for occupancy growth? Last year, I guess, occupancy grew about 80 bits sequentially. So do you expect similar growth? Sounds like probably not.

Yeah, what we said about occupancy is we expect it to increase sequentially. And so I would just, what I would think about is, Cindy just mentioned it, is that our year to date RevPoR growth, we expect it to be in line with year to date, year over year growth. So if you look at our supplement on page three, that you'll see our year to date growth has been 4.3%. And so kind of triangulating into from the RevPoR and then triangulating into occupancy, you'll see you can kind of get to how we're thinking about occupancy growth.

Thank you. And for my last question, so you're thinking about next year. I know you don't give a guidance, but just saying on occupancy, so far this way, this year occupancy has been growing about prehistorical seasonality. So is it fair to assume a similar trend to next year? And what could drive it higher or lower from here? Thank you.

Uh, yes, Joanna, we aren't giving guidance for 2025 at this point. But what I would say high level about 2025 is, you know, our expectation would be, we would be continuing set study and sustainable occupancy growth while all trying to kind of balance affordability and cost. We've delivered adjusted free cashflow growth of 15%, excuse me, adjusted EBITDA growth of 15% and adjusted free cashflow growth of 30%. We would expect to continue to deliver growth, but not giving guidance at this time. Thank you.

Of

course. Thanks,

Joanna.

And as a reminder, if you would like to ask a question, please press star and the number one on your telephone keypad. Your next question comes from line of Josh Roskin with Nefron research. Your line is open.

Hi, thanks. Appreciate you taking the call. Good morning. So just back onto these two third party marketing firms, it sounds like they're getting less referrals. Is there something changing industry wide or competitors doing more internally or is it just harder for them? I'm just curious what's going on with these two major aggregators.

So, um, big picture. One of the things that happened was there was a Google algorithm change that deprioritizes third party content. So we think that they are getting less leads just organically, which is one of the things, and that is affecting one of the two very significantly. The other not as much.

Okay. The other one just not maybe just, you know, just simply not seeing the same level of referrals.

Yes, they have reduced some of their marketing end.

And so, so where are these people getting, you know, where do these leads end up? Are these people self finding, you know, are they finding your communities on their own using this new, you know, with the change of the Google algorithm or do you think there's just fewer move-ins industry wide because of this disruption?

No, I think absorption in the industry is strong and I would say that the vast majority of our move-ins do come from internal sources, whether it is residents who live in a community and refer friends to move in with us, whether it is our own internal marketing campaigns or local community outreach. That's where the majority of move-ins come from. But as I mentioned earlier, we did historically get several hundred move-ins a month from these two third party referral sources. So we're really just resetting our strategy to capture that. I think over the longer term, at the end of the day, the more people who come to us directly, the better off it is for the relationship with us and the residents in prospect.

Yep, sure, sure. And then separately, can you speak to the competition and maybe the discounting environment and how that compares to what you were seeing last year as you headed into year end?

No, I'll say that the discounting has been, it's been a little heavier, sort of, I would say in the quarter than quite honestly we expected. And I do think that the presidential election maybe had something to do with it. One of the things that our chief sales officer tells us regularly is when there's uncertainty, prospects, older Americans in particular, are more reluctant to make decisions. So I do think there might have been some additional last minute discounting in third quarter leading up to the presidential election. The good news is the election's over now and there's more certainty about the direction of the country. And so that should bode well for us and others in the industry moving forward.

Okay, that makes sense. Thank you.

And your next question comes from the line of Tao Chau with Macquarie. The line is open.

Thank you. Good morning. I appreciate the earlier details on the guidance. I wanted to throw it down on the adjusted free cash flow number, which was very strong in the third quarter. So looking forward, Cindy, sounds like you expect significant free cash flow improvement next year. I want to make sure I have all the moving pieces in order. I think you mentioned the $15 million free cash flow contribution from the acquisitions. I think you got some lease restructuring down allowing to your landowners on the capex side, maybe some additional capex, cash flow upside from the Ventas transaction. Any other additional tailwind or headwind we should expect for cash flow? And then what is your confidence level that there will be firmly in positive free cash flow territory on an annual basis going forward?

So let me start and then Don can jump in. So we are committed to the Ventas assets through the end of December 31st, 2025. So unless there is a mutually agreed transaction, we would continue to operate the assets under the existing lease through then. So I wouldn't necessarily model that into your thoughts for 2025. One thing that could potentially have an impact is variable rate changes in interest rates. And so that is something that is about one point goes $13 million. So that's something that could have an impact. Don, are there other things that you might want to highlight?

No, I think you've captured all of them. I would just say remember our rate increase goes into effect January 1st. And we're confident in kind of the rollout of that rate increase. But other than that, I think the largest shifts that we're thinking about are in line with what you have.

That's great. So I want to go back to the comment earlier regarding strong clinical outcome you saw in the health and clear bridge performance. I know this is something that would excel versus your competitors. At this point, I think the PM PM contribution is still negligible. Given the growing scale this quarter, are you seeing additional evidence that you have successful leveraging that into a sales pitch or premium pricing anyway you can qualify the impact for us? And what do you think the threshold you need to clear for you to drive meaningful growth in the with your managed care partners, you know, either in membership base, clinical stats, anything else you need to call up here?

It's a great question. I am so proud of the fact that Brookdale residents in a health plus community get better clinical outcomes than residents living at home or in competitive senior living communities. Seeing that 80% reduction in urgent care or emergency room visits and the 66% reduction in hospitalization is something we are incredibly proud of. Brookdale health plus was always built on the understanding that if you have a better product for your residents, that you will have higher occupancy in the community and that translate into stronger cash flow. So that's how we built the program. The icing on the cake has always been the PM PM that we received from certain Medicare Advantage plans. It's something that is this point is something that essentially covers the incremental costs of a Brookdale health plus program. But I do think that continuing to strengthen the value proposition will allow us to continue to grow profitably. And so that's what we're really focused on.

Great. And if I may sneak in one more on the 41 acquisitions you did, are the performance consistent across the three portfolios? Or are there any assets you don't necessarily see fit with your current strategy that you could potentially dispose of at some point?

It's a really good question. The performance is different across the assets. Some of the assets we acquired under a very attractive favorable purchase option. They are an incredibly high quality market. Some of the assets that we acquired are smaller communities that may not fit exactly within our strategy. So one of the things that we were excited by is the fact that being able to more flexibility with the portfolio and the ability to recycle capital would give us improved opportunities going forward. So you'll hear more from us about that over the coming quarters. But the important thing to know is the transaction on its terms is a very solid financial return. And anything we might do with the portfolio structure after that would be attractive and additive to strong cash flow improvements that we talked about.

Awesome. I'll leave you there. Thank you. Thank you so much.

Thank you, Tal. Thank you. And there are no further questions at this time. This does conclude today's conference call. You may now disconnect.